Cross Border Deals: What to Look for and How to Manage

My firm has been approached by foreign firms several times this year and in 2017 who want to acquire PCB, PCBA, or other electronics companies in North America. This could certainly be a trend in the future. There are a wide variety of reasons why overseas firms would like to acquire a shop in North America:

• Market access, which is especially timely if U.S. trade policies change or if the U.S. imposes more tariffs in the future
• Establishing a prototype/quick-turn base here, in conjunction with overseas volume markets
• Geographic expansion: a need to grow beyond the company’s domestic market

There have not been a lot of overseas buyers in the North American PCB/PCBA industry over the past few years, but here are a few examples:

• Somacis (Italy)/Hallmark
• Graphic (UK)/IPC Calflex
• Ultra (UK)/Sparton

Whatever the reason, North American shops should be prepared in case a buyer comes knocking. Getting prepared in advance is a good idea if the owner is thinking of retiring, as a good buyer might move on to the next seller if the company is not prepared. Whether the buyer is domestic or foreign, good preparation includes having financial statements prepared by an outside CPA (audited or reviewed is preferred), cleaning up any balance sheet issues, having good corporate documentation, and understanding the process and the typical valuations and terms for companies in the industry.

It is difficult enough to put together deals between two U.S. parties that have already agreed on price, terms, and post-closing strategy. Adding the complexities of a cross-border deal just makes everything more difficult. So why deal with a foreign buyer? Because they may have put forward the best offer (or perhaps the only decent offer) based on the strategic reasons listed above. Also, a strategic foreign buyer might be more interested in keeping a facility in place and making investments. Being aware of the following issues with help to get a deal completed.

Some of the issues that are particular to overseas buyers include:

1. Communications

This is usually the biggest issue in overseas deals. Communications can be difficult even between two U.S. parties during a transaction, and if a foreign language is involved it becomes more complex and time-consuming. It is important to be patient, and it can be helpful to hire an interpreter for at least one or two initial meetings. Even if the buyer’s team speaks good English, an interpreter can help make sure that there are no misunderstandings.

2. Lengthy Transactions

Not only due to time zone differences, but overseas buyers may have multiple decision-makers, and travel is more expensive and time-consuming. Be prepared for deals to take extra time, but balance being patient with the need to keep the deal moving.

3. ITAR Issues

If the U.S. shop has significant military/defense revenue, foreign buyers may not be able to retain this business after a transaction. Even a ‘friendly nation’ buyer may lose some of this business. Be sure to have this discussion up front with the buyer early in the process.

4. U.S. Government Approval

Like ITAR issues, the U.S. government has shown reluctance to approve deals that involve sensitive technology. Have an attorney who is familiar with these issues investigate the risks early in the process.

5. Regulatory Issues, Taxes, Environmental Matters

These issues are difficult for domestic firms to follow, let alone a foreign buyer. For example, in the case of PCB shops, it may be difficult to obtain permitting if the buyer wants to move the shop to a new location. It is important that the foreign buyer have competent local advisors who are aware of these issues, and to avoid any surprises at the last minute (or after closing).

6. Knowledge of Local Customs and Practices

When engaging with suppliers, customers, employees, and other stakeholders, foreign buyers often do not understand the nuances of local customs. There can be a large difference even between California and New York company customs, so adding an overseas component can exacerbate the issue. Be sure to explain any important practices, and do not assume that the buyer understands things. The seller’s employees may be nervous about being sold to a foreign buyer, so it will be important to explain the deal properly. Also, foreign buyers might not be familiar with the culturally diverse workforce in North America. There are various consultants who specialize in doing business with different cultures, which can be helpful in educating both parties and smoothing out the differences.

Those are some of the major issues, but certainly other issues can come up. For example, if the dollar strengthens or weakens during a deal, it might change the financial models of an overseas buyer. Also, global politics or other events might derail a deal. We once had a deal fall apart because a foreign buyer could not believe that a U.S. PCB shop could make such high-end products for space applications using 20-year-old equipment. It is important to be prepared, patient, and open to cultural differences when working on a cross-border deal.

Tom Kastner is president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Securities transactions are conducted through StillPoint Capital, LLC, Tampa, FL member FINRA and SIPC.